STOCK PRICE RESPONSES TO CHANGES IN GOVERNMENT BUDGET DEFICITS: EVIDENCE FROM MAJOR WORLD MARKETS
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In this study, we investigate the relationship between budget deficits and stock prices in France, Germany, Japan, and the U.S. from 1974 through 1995. The evidence from impulse response analysis and Granger causality tests shows that, in the short-run, only in the U.S. do deficit reductions have a positive effect on equity returns. Howeve1; in the long-run, tests show that equity prices in all markets are cointegrated with government budget deficits. Therefore,inthelong-run,governmentdeficitsplayanimportantroleinthestabilityofequitymarketsand thus, influence the ability offirms to raise capital.
Abstract
In this study, we investigate the relationship between budget deficits and stock prices in France, Germany, Japan, and the U.S. from 1974 through 1995. The evidence from impulse response analysis and Granger causality tests shows that, in the short-run, only in the U.S. do deficit reductions have a positive effect on equity returns. Howeve1; in the long-run, tests show that equity prices in all markets are cointegrated with government budget deficits. Therefore,inthelong-run,governmentdeficitsplayanimportantroleinthestabilityofequitymarketsand thus, influence the ability offirms to raise capital.